The Tax Implications of Failing to Register a Technology Transfer Agreement
The Ghana Investment Promotion Centre Act, 2013 (Act 865) (“GIPC Act”) and the Technology Transfer Regulations, 1992 (L.I. 1547) (“TTA Regulations”) constitute the main legal framework for the regulation of Technology Transfer A
A TTA is an agreement between a foreign entity and a Ghanaian entity for a term of not less than 18 months and not more than 10 years, and involves the following services:
- the assignment, sale and licensing of all forms of industrial property;
- the provision of technical expertise in the form of feasibility studies, plans, diagrams, models,
- instructions, guides, formulae, basic or detailed engineering designs, specifications and equipment for training, services involving technical advisory and managerial personnel and personnel training;
- the provision of
technologicalknowledge necessary for the installation, operation and functioning of plant and equipment and turnkey projects; and
- the provision of
technologicalknowledge necessary to acquire, install and use machinery, equipment, intermediate goods or raw materials that have been acquired by purchase, lease or other means.
All TTAs are required to be registered with the Ghana Investment Promotion Centre (“GIPC”) in order to be effective. The GIPC may only register a TTA if the following requirements are met:
- the term of the TTA should be for a period not exceeding 10 years. The TTA is, however, renewable for additional terms not exceeding five years at any point in time subject to the approval of the GIPC;
- the effective date of a TTA is the date the GIPC registers the TTA and not a date agreed to by the parties to the TTA;
- the applicable fees for the provision of services under a TTA are:
- management services – not exceeding 2% of profit before tax;
- royalties – not exceeding 6% of net sales;
- technical services only – not exceeding 3% of net sales;
- technical services and know-how – not exceeding 5% of net sales; and
- technical services, know-how, management services and royalties together – not exceeding 8% of net sales.
- the level of payments allowed for management fees must be reduced pro rata if the transferor owns 60% or more of the share capital of the transferee company. Where the transferor company owns the transferee company 100%, no fees will be charged for management services;
- the TTA must include a detailed computation of the forecast of fees to be paid by the company during the term of the TTA. The forecast should include expected gross revenue, applicable deductions, profit before tax, applicable fee percentages and the amount to be transferred per annum for the entire duration of the TTA;
- the TTA must be governed by Ghanaian law; and
- the TTA must include a clause for the provision by the transferor of requisite training for the transferee and its personnel in the effective utilisation of the technology and must attach, to the TTA, a detailed training schedule which must guide and be adhered to by the transferor in the provision of the training. The schedule must have information specifying the purpose of the training, the category of staff to be trained, the course content, mode/method of training, duration, approximate dates and venue(s) of the training.
Where fees to be paid under a TTA include royalties, the TTA must provide that taxes due on royalties shall be paid by the transferor. A TTA must comply with transfer pricing rules specified in the Income Tax Act, 2015 (Act 896) and the TTA Regulations.
A TTA that fails to meet the requirements set out above is unlikely to be registered by the GIPC. The failure to register a TTA renders that TTA ineffective and both the local and foreign entities under the TTA will be denied all benefits that may be claimed under the GIPC Act and other applicable laws. The Ghanaian entity will not be able to transfer funds to the foreign entity as contemplated under the relevant TTA. The recent decision of the High Court of Ghana in the case of Beiersdorf v Commissioner-General of Ghana Revenue Authority has further shown that a Ghanaian company cannot claim a tax deduction for any payment made to the foreign entity if the TTA is not registered with the GIPC. The court also indicated that the description or title of an agreement does not determine whether that agreement is a TTA or not. A TTA may only be determined by a review of the entire terms of the agreement.
Summary of Beiersdorf case
The Ghana Revenue Authority (“GRA”) conducted a tax audit on the operations of Beiersdorf Ghana Limited (the “Appellant”) for the 2014, 2015 and 2016 years of assessments. A tax liability of GHS1 689 149.34 (subsequently reduced to GHS1 085 392.36) was made against the Appellant. The Appellant had 30 days to pay the tax liability. The Appellant applied to the Commissioner-General of GRA for a review of the findings of the tax audit. The application was dismissed by the Commissioner-General. The Appellant then made an appeal to the High Court on 18 January 2018 on three grounds, including a claim that the GRA erred in disallowing payments made by the Appellant to Beiersdorf AG, the offshore parent company of the Appellant (the “Parent”) as royalty payments under a distribution licence agreement (the “Agreement”).
In an opposition to the Appellant’s case, the GRA argued that the agreement was a TTA and was required to be registered with the GIPC. Consequently, the GRA disallowed all tax deductions in respect of payments made by the Appellant to the Parent for non-registration of the agreement with the GIPC. The Appellant disagreed that the agreement was a TTA within the context of the GIPC Act. The Appellant submitted that the payments were made for the use of a
The court held that, in order to determine whether an agreement qualifies as a TTA, it is important to review the contents of the agreement and that reliance should not be made solely on the basis of the description given to the agreement. The court established that the agreement was a TTA and the failure to register the agreement with the GIPC rendered all tax deductions claimed in respect of payments to the Parent unlawful. The GRA was thus right in disallowing such deductions.
In the circumstances, the court dismissed the Appellant’s case in its entirety for lacking merit.
The decision in this case highlights the importance of subjecting agreements entered into between Ghanaian companies and foreign entities to the TTA requirements discussed above. Where an agreement qualifies as a TTA, all the usual rules, particularly on registration and fee percentages, will apply. Failure to register such agreements may trigger among other things, tax liabilities including interest and other penalties.
Cletus is an Associate at ENSafrica with interest in Taxation and Project Finance
Very useful article for owners of foreign entities with business interest in Ghana and tax practitioners.
Thank you, Cletus, for this insightful piece. I look forward to reading more from you.
Well, the decision by the court to me was purely determined on a wrong factual basis as well as wrong legal basis. The issue is what’s the legal basis for the deduction of an expenditure? If the court had determined that issue in the first place, I believe the decision would have been different.
1. Thus, was the expenditure in the nature of a capital expenditure or revenue expenditure?
2. Was the expenditure wholly, necessarily and exclusively incurred in producing income?
If the court had considered these factors, I think the conclusion would have been much well appreciated.
The transaction would have to be recognised to enable the taxpayer claim a deduction. In this case the transaction was not recognised as valid under law and so there is no need to determine if it is capital or revenue expenditure. There is also no need to determine if it was wholly, necessarily or exclusively incurred. Bribes are wholly, necessarily and exclusively required for carrying out smuggling, however, because such payments are illegal, Danielthe income will be recognised for tax purposes without granting the expense.
My problem, in the case, is whether there is any provision for tax deduction for payments to parents by subsidiaries. This is pure income shifting and tax avoidance activity, violating transfer pricing rules and leads to tax base erosion. In business combinations, related party transactions are given closed watch for tax avoidance. I ask, why would the appellant think that, payment for use of trademarks should not be taxed, when the LI 1547, on technology transfer, lists trademarks as part of industrial property.